NC Muni Broadband Spurs City-Town Lawsuit

Two North Carolina municipalities are at odds over funding of one city’s broadband system. The City of Salisbury and the Town of Spencer—both located in Rowan County—will likely wind up in court to settle whether Salisbury possessed authority to borrow $5 million from Spencer’s water and sewer capital reserve fund to help finance Fibrant, the city’s fiber-optic services.

Salisbury’s Fibrant was financed with $33 million in debt and went online in late 2010. City officials say Fibrant will become self-sufficient by 2014, but it has thus far relied on the $5 million “interfund loans” it borrowed at 1 percent interest from Spencer’s water and sewer fund.

Salisbury assumed contractual responsibility for Spencer’s water and sewer system in 2000, after Spencer claimed the town could not afford the compliance costs of the system’s administration. The contract explicitly states, “[A]ll revenues of [Spencer Utility Department] shall be used exclusively by the water and sewer fund and shall not be used to subsidize any other operations.”

Spencer officials say the Fibrant loans violate the sewer and water contract. “If you’re using water and sewer money as your own little slush fund, and you continue depleting it, you’re going to have to increase your reserves, and the way you do that is raise rates,” Spencer Alderman Jeff Morris told Carolina Journal.

‘Irresponsibly Risking Taxpayer Money’“Like almost every other city project—convention centers, sports stadiums, and light rail systems—city bureaucrats underestimate the costs and overestimate the revenues,” said Michael Sanera, research director and local government analyst for the North Carolina-based, free-market John Locke Foundation think tank. “When confronted with the next too-good-to-be-true project, city elected officials should double the costs and cut the revenues in half to get a more accurate picture of reality.”

In 2009, Sanera authored a JLF study on Salisbury’s municipal fiber-optic system, in which he declared the venture a “corporate welfare project paid for by the average taxpayer.” Sanera’s report continued: “By investing millions of dollars in this telecommunications project, Salisbury officials are irresponsibly risking taxpayer money,” adding “the city should be managing its essential services before taking on such risky and expensive ventures with taxpayer money.”

Sanera’s research indicates Salisbury would require 28 percent of the city’s residents to pay Fibrant subscription fees to cover the broadband costs, a projection he labeled “overly optimistic.”

‘Best Left to Private Sector’Jim Lakely, director of communications for The Heartland Institute, which publishes InfoTech & Telecom News, concurs with Sanera: “When municipalities make the mistake of jumping into the expensive and ever-changing market for broadband—a market best left to the private sector, alone—what is happening in Rowan County is the inevitable result. The poor taxpayers of that county are now the unwitting financiers to a business plan doomed to failure,” he said.

“No private firm could get its hands on an almost interest-free loan to prop up a failing enterprise,” Lakely added. “Yet that slush fund creates an unfair advantage that further discourages competent broadband companies from entering the market and serving customers. So the taxpayers are double losers—sinking money into a doomed project that, in turn, ensures no private firm will come in to provide broadband at an affordable price.”

In February, Spencer officials voted to approve a request-for-proposals from attorneys to represent the town in a potential lawsuit against Salisbury. For its part, Salisbury has contracted with Randy Tinsley, a Greensboro lawyer who has advised the city on utility issues in the past.

As reported in the Carolina Journal Online, Salisbury City Manager Doug Paris sent an email to City Council members in which he stated, “[Tinsley] has reviewed our agreement with Spencer and has shared that the agreement is not breached by the loan to the broadband utility during its start up phase.”

“This is turning out to be a rather expensive 'I told you so' for the residents of Rowan County,” said Lakely.